Land of Opportunity Can Fight Inequality

July 15th, 2012

July 15, 2012

Even if the process proves protracted, the American economy will eventually recover. Yet even as cyclical issues cease to dominate the economic conversation, it is likely that inequality will move to the forefront.

There is no question that income is distributed substantially more unequally than it was a generation ago, with those at the very top gaining a greater share as even the upper middle class loses ground in relative terms. Those with less skill – especially men who in an earlier era would have worked with their hands – are losing ground not just in relative but also in absolute terms.

These issues frame an important part of the economic debate in this election year. Progressives argue that widening inequality jeopardises the legitimacy of our political and economic system. They argue that a time when the market is generating more inequality is no time to shift tax burdens from those with the highest incomes to the middle class, as has taken place in the past dozen years. And while recognising that innovators such as Apple co-founder Steve Jobs earned their billions providing great value to consumers and making substantial contributions to the US and global economies, they assert that the social value associated with the activities behind many other fortunes, especially in finance, is less apparent.

Conservatives argue that, in a world where everything is increasingly mobile, high tax rates run more risk than they once did of driving businesses and jobs overseas. They highlight the central role of entrepreneurship in advancing economic growth and note that, since most new ventures fail, the returns on successful ones have to be very large if entrepreneurship is going to flourish. They take umbrage at the suggestion there is something wrong with success on a grand scale. And they worry that policy measures taken to combat inequality directly will have perverse side effects.

Unfortunately, the points on both sides of the argument have considerable force. While I support moves to make the tax system more progressive, the reality is that inequality is likely to remain high and continue to rise, even in the face of all that can responsibly be done to increase the burden on those with high income and redistribute the proceeds. Measures such as allowing unions to organise without undue reprisals and enhancing shareholders’ role in executive pay-setting are desirable. But they are unlikely even to hold at bay the trend towards increasing inequality.

Where does this leave the public policy agenda? The global record of populist policies motivated by inequality concerns is hardly encouraging. Equally, passivity in the face of dramatic economic change is unlikely to be viable. Perhaps the focus needs to shift from inequality in outcomes, where attitudes divide sharply and there are limits to what can be done, to inequalities in opportunity. It is hard to see who could disagree with the aspiration to equalise opportunity or fail to recognise the manifest inequalities in opportunity today.

By definition, the number of children not born in to the top 1 per cent who move into the top 1 per cent must equal the number of those born into the top 1 per cent who move out of it over their lifetimes. So a serious programme to promote equal opportunity must both seek to enhance opportunity for those not in wealthy families, and to address some of the advantages enjoyed by the children of the fortunate.

The most important step that can be taken to enhance opportunity is to strengthen public education. For the past decade we have focused on ensuring no child is left behind, and this must continue. But if we are to ensure everyone has a real chance of great success, we must also ensure every child in the public system can learn as much and go as far as their talent permits. This means judging schools on measures beyond the fraction of students who exceed some minimum. The leading universities have in the past 40 years, with the encouragement and support of the federal government, made a significant effort to recruit and support students from ethnic minorities. This should continue.

But as things stand a student from a minority group who has strong admission text scores is considerably more likely to apply, and be admitted, to a leading university than a low-income student. It is time the best institutions undertook the kind of commitment to economic diversity that they have long mounted towards racial diversity. It is not realistic to expect that schools and universities dependent on charitable contributions will not be attentive to offspring of their supporters. Perhaps, though, the custom could be established that, for each “legacy slot”, room would be made for one “opportunity slot”.

What about the perpetuation of privilege? Parents always seek to help their children, and it is not realistic to think privileged parents will do any differently. But there is no reason why the estate tax should decrease relative to the economy at a time when great fortunes are increasingly dominant. Nor should tax-planning techniques that are de facto tax cuts only for those with millions of dollars of income and tens of millions in wealth continue to be legal.

These are some ideas for advancing equality of opportunity. There are many more. It is an aspiration those of every political stripe should share.

Lawrence H. Summers is the Charles W. Eliot University Professor and President Emeritus at Harvard University. He served as the 71st Secretary of the Treasury for President Clinton and the Director of the National Economic Council for President Obama.